Department Budget: briefing; Hearings Report

Delivery Strategy
The Director General said that the Department has set itself seven steps to success, which are:
- Energising Vision
- Key Delivery Points
- Improving Processes
- Monitoring and Evaluation
- Improving Support Systems
- Our People
- Communicating
- Building DTI

In his concluding remarks, Dr Ruiters told the Committees that his Department has adopted three key words for this year: "Communicate, Communicate, Communicate". Communicate with people; communicate with clients.

Discussion
An ANC member made an observation that last year one of the Department's priorities was to promote Black Economic Empowerment (BEE) and small, medium and micro enterprises (SMMEs). As far as he was concerned, nothing has changed in that sector. Again this year the Department is making that sector one of its priorities. He asked how this year is different from last year.

Dr Ruiters responded the objectives have not changed. Last year there were three objectives, to promote investment levels, to promote a number of businesses for Black Economic Empowerment through procurement, and to distribute R75.4 million in efforts to export through the Export Marketing and Investment Assistance (EMIA) scheme of which 72 percent went to small businesses and 15 percent to large.

Dr R Davies (ANC) also made an observation that the style of this year's budget was similar to that of last year and asked how much money was allocated for taxi recapitalisation?

Dr Ruiters said this year's budget emphasis was on the Department's core business, unlike last year. He pointed out that this year divisions were taking charge of their own budgets. Last year the Department came to the Committee and said how much it wanted without knowing how much the divisions would spend. This year it is the divisions that will say how much they need. Dr Ruiters added that this year the Committee could make him accountable for what he promises to deliver. If he says the Department will open three foreign offices and establish CITA by the end of this year he should be accountable for that.

On taxi recapitalisation Dr Ruiters said R70 million has been allocated for that purpose and the process is close to finalisation. The final list of tenders will be five or six companies. Advertisements have been placed on the electronic system. One of the criteria is a cash flow estimate based on current prices.

Mr Kolweni (ANC) asked whether SMMEs qualify for incentives.

Dr Ruiters said he was worried how SMMEs were projected. He said his Department has created a Black Economic Empowerment Directorate and Enterprise Development, moving away from acronyms such as SMMEs to Small Business Development. He said small business was very much on the DTI's agenda and pointed out that "you can't grow the economy without small business support." On access to incentives, he said progress has been made in the area of small business finance. The problem is communication. He said the new criteria would allow people to access grants depending on how their companies are performing.

Mr Moosa (ANC) commented that he had been encouraged by DTI's approach lately. On barriers to entry in to the country, he said that was under the jurisdiction of Home Affairs and not DTI. The Department can speak of how it is going to attract investment but Home Affairs may not behave patriotically. He asked how DTI can face this challenge. Second, on industrial strategy, the Department has identified four specific industries. Will this stop the Department from focusing on industry in general. For instance, what is the Department doing with challenges from countries like China?

The Director General said he recognizes barriers to entry but said there have between positive moves between his Department and Home Affairs. For instance DTI presented 700 notifications to Home Affairs and has since resolved 642 of the cases involving work permits. The next move is to make DTI an issuing agency so it is a One-Stop Investor Service. He recognizes that the work permit issue affects not only firms but also the skills market in general.
On industrial strategy, the DG said the Minister is to make an announcement this year during a Nedlac summit. One deliverable the Department is determined to achieve this year is to open offices at the provincial level. But that would come after foreign offices have been opened.

In reply to the question on stimulating the economy through industrial strategy, he said that out of the Department's budget of R2.2 billion, R1.8 billion is for incentives which support business in this country.

In answer to Mr Rasmeni (ANC) asking about DTI's role in cooperative governance, Dr Ruiters said the Department meets once a month with heads of provinces. They are also looking at interacting with executive mayors of unicities who are running huge annual budgets.

In response to Mr Duma (ANC) asking how the Department calculates the foreign offices budget, Dr Ruiters conceded that foreign offices use a lot of money but it is seen as essential in not only marketing the country's products but also in attracting investments. He said DTI was now doing a study on efficiency and an evaluation to see whether objectives have been reached.

Ms Shope (ANC) asked what e-tendering means and why the CSIR was not involved with the National Plant Fibre Technology Centre. On International Trade, she inquired whether the 44 percent travel budget on International Economic Development would be reduced.

Dr Ruiters said that e-tendering is a way of speeding up tendering through automation. Since introducing the pilot project, the processing of tenders has been four times faster than before. On the National Plant Fibre, Dr Ruiters said that the CSIR is a strategic partner in this project. As to whether the travel budget will be reduced, Dr Ruiters doubted it very much. He said as the need to globalise increased the need to talk to counterparts in other countries also increased.

Adoption Of Report On Hearing On Estimation Of Jobs Created As Result Of Arms Deal Procurement Programme
The Chair summarised the report (see Appendix below) and asked for comments. There were none. The Report was adopted.

Appendix:
Report on Job Creation Estimates arising from Industrial Participation programmes linked to Strategic Defence Arms Procurement Programme

Portfolio Committee on Trade & Industry; Select Committee on Economic & Foreign Affairs

In its fourteenth report dated 30^th October 2000, the Committee on Public Accounts (COPA) "expresse[d] concern at the possibly optimistic estimations of jobs to be created" by the Industrial Participation programmes linked to the strategic defence arms procurement programme and "advise[d] of its intention to request the Portfolio Committee on Trade and Industry to express its opinion on this" (ATC Bulletin, 2 November 2000, p 1057). In order to assist the Committee in responding to this request, the Ministry of Trade and Industry and various research institutes specializing in these matters were invited to make submissions at a public hearing held on February 6 2001. Other interested parties also requested an opportunity to make written or oral inputs. The public hearings were held jointly with the NCOP Select Committee on Economic and Foreign Affairs and the following is a joint report of the two Committees.

1. Executive Summary of Oral Presentations
As several of the presentations raised matters that went beyond the specific matter referred to our Committees, copies of all written material received were forwarded to COPA for its consideration. The following executive summary is of the main points made by those who made oral submissions.

Mr Alec Erwin, Minister of Trade and Industry.
The Minister indicated that his Department's involvement arose from its responsibility for the National Industrial Participation Programme (NIPP), which was approved by government some years ago. The NIPP applies to all procurements by government structures where the imported component exceeds US $ 10 million. The Strategic Defence Arms Procurement Programme is subject to this broader policy. The decision to procure weapons stands on its own merits and follows Parliament's approval of the Defence Review in April 1998. The NIPP is not a simple "offset" programme. It is based on a more complex model that seeks to use major procurements by all government structures to leverage in investment. The model was developed after extensive study of international experience, and government was well aware of the risks and dangers of "offsets". The Non-Defence Industrial Participation projects (NIPs) that were negotiated in relation to the weapons procurement programme were not selected on the basis of the value of the offers alone, but rather were ranked in terms of their potential contribution to broader industrial policy objectives. The projects selected and negotiated with suppliers were intended to create specific capacities in our industrial economy and focused, in particular, on specialist steel product production, auto-components and other strategic sectors. Negotiators were specifically not mandated to seek performance bonds with a value greater than 10% of the purchase because there would then be a risk that the cost of the IP projects would inflate the purchase price.

The Minister said that estimates of investment and job creation were undertaken as part of the risk and economic impact assessment. The business plans of the various projects indicated that 6.264 direct jobs would be created during the first ten years, with a further 6.200 over the following five years. The risk and economic impact assessment had been based on a more conservative estimate that 9.400 direct jobs would be created in the various projects by 2008, plus 4.000 direct temporary jobs in construction and a further 1.500 permanent jobs in steel mills. This gives a total of 14.900 direct jobs. This total was then multiplied by 4 to give an estimate of "indirect job" creation. The Minister said that he was confident that these projections were attainable, and indicated that 15% of the projects measured by value had already begun to be implemented. The NIP projects were expected to yield an estimated R 100 billion in knock on benefits (export revenue plus investment). Non-defence industrial investment would total R 24 billion.

Mr Guy Lamb, Professor Paul Dunne and Professor Richard Haines, Project on "Industrial Participation and Industrial Development" coordinated by Centre for Conflict Resolution.

The presentation was based on an ongoing research project on the implications of NIP projects for industrial development in the Eastern Cape province and the Nelson Mandela metropole. The presentation began with a review of international experience with "defence offsets". From this the presenters concluded that while offsets can attract and focus investments, they also have the potential to distort and undermine an integrated industrial strategy. The presenters expressed the view that it was generally better to seek a price reduction through "off the shelf" purchases than to pursue "offsets". With reference to the Eastern Cape and Nelson Mandela metropole, they suggested that there was a tension between the NIP projects identified to be located in the Coega Industrial Development Zone and the trajectory of economic development identified for the area by the Eastern Cape Provincial Government and the Municipality of the Nelson Mandela metrople. While acknowledging that their research was still at an early stage, the presenters suggested that "offsets" and defence related industrial participation tend to focus on the periphery of the country's industrial strategy, and would tend to reinforce the reproduction of the "mineral and energy complex" rather than promote a more robust industrial development. The presenters argued that the projects appeared to have been selected through a "top down" process with little signs of an attempt to synergise with local economic development initiatives. They also questioned the validity of the procurement package in relation to the security needs of the country.

Mr Terry Crawford-Browne, Economists Allied for Arms Reduction (ECAAR)
Mr Crawford-Browne argued that international experience showed that "promises of job creation related to arms acquisition are grossly exaggerated" and suggested that South Africa would be no exception. He alleged that many of the details of IP projects were hidden behind a veil of "commercial confidentiality" and called for greater transparency in this regard. He said that "offsets" had been prohibited in trade agreements between the European Union and North American Free Trade Area because they are difficult to oversee and tend to distort economic activity. He warned that several of the projects would be likely to rely on imported skills rather than local human resource development, and said that research had shown that the corvette acquisition programme that was being negotiated by the previous government would have resulted in a net loss rather than gain of jobs.

Mr Jeff Ashmead, Mr Ken Warren, Mr Gerald Wolman and Ms Peggy Drotskie, South African Chamber of Business (SACOB)

The SACOB presentation focused on identifying potential problems with counter trade deals and certain principles to guide such transactions. The presenters expressed the view that counter trade was not an ideal vehicle for industrial policy or investment promotion. Counter trade tended to conceal prices and distort markets. Further drawbacks to such deals, included:

Inefficiency: International experience showed that such deals often involve the payment of large commissions to brokers, which amount to a "hidden cost", making counter trade an expensive and often unprofitable way to trade.
Complicated: A web of international transactions often mean that the only beneficiaries from transactions are intemediaries.
Risky: The transactions involve commodities that are price volatile, and this is compounded by exchange rate uncertainty.

The reduction in world military expenditure following the end of the cold war, suggest to SACOB that the international arms trade might be buyer's market. This may present opportunities for South Africa to negotiate benefits from the international industry. While SACOB was wary of counter trade deals, they did not suggest that the present deal be undone. Rather SACOB called for there to be an accountable process, coupled with sufficient checks and balances and public transparency. SACOB also called for an equitable spread of opportunities from offset arrangements
.
1.6 Ms Tania van Mierless and Mr Niel Coleman, Congress of South African Trade Unions (Cosatu)
The Cosatu presentation focused on the broader issue of the opportunity cost of the arms deal in comparison with the potential impact on the economy and job creation of alternative developmental projects. Cosatu argued that Government spending has the potential to increase employment and enhance skills development. However, arms acquisition and the industrial participation projects linked to that programme would "aggravate the dichotomies in the economy and not narrow them". This was because the armaments industry was skill and capital-intensive, dominated by white males, located in metropolitan areas and characterized by concentrated ownership. The defence industry also did not have a strategy to link itself to the civilian economy.

Cosatu also argued that the arms procurement programme would redirect Government spending away from social services to defence. This in turn would constrain employment growth and the social wage. The presenters believed that social service spending would decline in real per capita terms over the next three years, with broader implications for labour. The presenters said that the industrial participation programmes did not include a sufficient training or employment equity component to counter such trends and efforts to evaluate their impact in this regard were frustrated by commercial secrecy clauses. Cosatu called for more information to be released on the nature of investments in IP projects and on the new jobs to be created. In concluding, the federation recommended a parliamentary inquiry "if the channeling of resources is found to be problematic and the opportunity costs are found to be high".

1.7 Response by Minister Erwin
The Minister said that the point of departure of many of the submissions was opposition to the arms procurement programme and to the use of "offsets". Government had decided to make this procurement and would not seek to reverse the contracts it had entered into. It was also Government's policy to have an Industrial Participation Programme. Government was not blind to the problems encountered in "offset" programmes elsewhere. But many of the examples cited were not applicable to South Africa. The present deal was not being undertaken by an economy in dire straits desperate to find some mechanism to promote foreign investment. IP was an instrument, but not the sole instrument, of industrial policy.

The Minister welcomed proposed research projects to check on the unfolding of the programme: to check whether a country with some industrial and negotiating capacity can succeed. The IP linked to the arms procurement was being used to enhance manufacturing and beneficiation of primary products by developing strategic capacity. A conscious decision had been taken not to try to sustain a massive defence industry producing a wide range of weapons systems. Current policy aimed at retaining only certain areas of strength that could feed into the development of a modern industrial economy. Commissions had not been paid to intermediaries as Government had chosen to negotiate directly with the prime contractors. Every effort had been taken to liaise with Provincial and Local authorities over the design of projects.

2. Conclusions and Recommendations
As indicated above, the specific issue that our Committees were requested to "express [their] opinion on" was the estimations of the jobs to be created as a result of the Industrial Participation programmes (both DIPs, and NIPs) negotiated as part of the Strategic Defence Armaments Procurement package. In its report, COPA expressed its "concern at the possibly optimistic estimations" in this regard (ATC 2 November 2000, p 1057). We will confine our own remarks to the specific matter referred to us, and not offer any comment on the broader issues raised in many of the submissions made to us - which clearly fall outside our own terms of reference.

Whether or not these estimates are "optimistic" would, in our view, appear to depend on (1) the accuracy of the basis on which they are calculated (2) the degree to which the IP projects will, in fact, be implemented.

The estimate of approximately 65.000 jobs, in fact, embraces jobs in various categories. First, there are the jobs expected to be created in the specific IP projects agreed, or under negotiation, with the contractors - both DIPs and NIPs. These include both jobs in the factories or plants expected to be created by the various projects and also jobs expected to be created in the construction of those factories or plants. Both of these are called "direct jobs" i.e. the jobs that will be directly created by the projects. Not all of these will, however, be "permanent". The construction jobs, in particular, will last only as long as it takes to construct the factory or plant i.e. will be "temporary". Many of these could, in fact, be expected to have disappeared before many of the project jobs kick in. The estimates of "direct jobs", in other words, measure all the jobs that will be created over the period until 2008, and not the number of jobs that will exist at any one time. The maximum number of "direct jobs" existing at any one time will thus be less than the estimates of the total number that will be created along the entire period.

In addition to "direct jobs", the estimates also include a number of "indirect jobs" that will be generated by the programme. These, we understand, relate to downstream and upstream activity that will be generated by the IP programmes. For example, if a steel mill is built it will require cement and will thus create demand for cement and cement industry workers. The number of "indirect jobs" is estimated on the basis of a multiple of the number of direct jobs. Again the total refers to all the "indirect jobs" that will be created along the entire contract period and does not necessarily mean that all these jobs will exist throughout the entire period. For example, the "indirect jobs" in the cement industry would be generated during the construction period. Once again, therefore, the maximum number of "indirect jobs" that will exist at any one time will be less than will be created along the entire contract period.

According to the information provided by the Ministry of Trade & Industry, calculations based on the business plans of the NIP projects estimate direct job creation over the first ten year period at an average of 6.264 jobs, or just over one tenth of one per cent of non-agricultural employment of 5,95 million in 1998. Over the next five years, a further 6.200 new manufacturing jobs are expected, according to the business plans, to be created by these projects.

The final affordability study was based on more conservative estimates. These were as follows:

Total Number of Direct Jobs created in various projects to 2008: 9.400
Total Number of Direct Jobs in construction 4.000
Total Number of Permanent Jobs in Mills 1.500
Grand Total of Direct Jobs 14.900

In calculating the number of indirect jobs a multiplier of 4 indirect to each direct job was selected. This is based on ratios used in various econometric modeling exercises applicable to the economy as a whole, and compares to a ratio of 10 indirect:1 direct job which the Ministry says was achieved in some other non-Defence related National Industrial Participation Programme projects. Applying the multiplier of 4 to the figure of 9.400, 11.900 or 14.900 gives a range of indirect jobs from 37.600 to 59.600.

The figure of approximately 65.000 (actually 64.165) direct and indirect jobs was based on a different method of working back from projected investments, export orders and domestic turnover. This yielded a result in the same range as the calculations conducted for the affordability study.

The Ministry also told us that several of the projects (13 out of a total of 70 projects) had already started. The number of direct jobs created or retained in these projects to date was as follows:

BAA/SAAB (6 projects) 1.358
Agusta (2 projects) 177
Thyssen (1 project) 70
Thomson (3 projects) 378
Ferrostaal (1 project) 60
Total (13 projects) 2.043

Taking into account the record of actual direct job creation to date, the estimates of expected direct job creation arrived at by three different methods of calculation do not seem to us to be overly optimistic, provided of course that the contractual obligations of suppliers are complied with. We have not interpreted our mandate from COPA as requiring us to pronounce on whether or not we think the NIP contractual obligations will actually be fulfilled. We concur with COPA that "…the economic benefit of these NIPS [is] a significant part of the bigger 'value for money' composition of the arms deal and as such sees a strong responsibility on the part of government to enforce them" (ATC p 1057). Minister Erwin indicated to us that government was committed to achieving this and, as indicated above, some 15% of the total projects measured by value have already begun to be implemented.

As far as the indirect jobs are concerned, the estimates rest on econometric assumptions that we as Committees do not feel qualified to comment on. We cannot, in other words, offer any useful comment on the assumption that 4 "indirect" jobs will be created for each "direct" job - which may be higher or lower. This depends on opinions about econometric models that are used in government for other purposes. It also depends on one's views on a matter raised explicitly in the Cosatu submission and implicitly in some of the others as to whether or not there is an "opportunity cost" in terms of job creation from the decision to procure weapons as against using the resources for other purposes.

Some of the confusion and misunderstanding on the job estimates appears to us to arise from not fully understanding the way in which the figures were arrived at, and perhaps from "optimistic" presentations or expectations in some quarters that mis-interpreted or misunderstood the total to be created along the contract period as the number of jobs that would exist at any one time. Some confusion or misunderstanding of the 65.000 total as the direct jobs that would arise from the projects also seems to have been evident in some quarters.

It would seem to us that from the point of view of Parliamentary oversight, whether by COPA or other Committees including our own, what is needed is a relatively rigorous and clearly measurable set of indicators against which actual performance can be assessed. The estimate of direct jobs used for purposes of risk and economic impact assessment seem to us to offer a relatively clear, coherent and realistic set of estimates/targets. We would, therefore, recommend that assessments of outcomes of both DIPS and NIPS as far as job creation is concerned should be based on estimates of "direct" jobs.

The Committees would like to thank all of those who made submissions.